At a meeting on Sunday June 27 the representatives of the euro area countries, the ECB and Denmark, presently the only ERM II member, decided to approve Estonia’s application to join the Exchange Rate Mechanism II. Entry to the ERM II leaves the exchange rate of Estonian kroon unchanged. Also in coming years Estonia will run the currency board arrangement with a fixed exchange rate, one euro corresponding 15.6466 Estonian kroons.“The decision to approve our application to join the exchange rate mechanism is of historical importance for Estonia, as it creates a possibility for us to be technically ready for the single currency by the middle of 2006. It is primarily a recognition to the viability of our economic and budgetary policy principles in the united Europe. Joining the exchange rate mechanism enables further integration of our economy with Europe´s nearly half-billion single market, which undoubtedly increases the well-being of all the Estonian people via faster economic growth,” said Mr Taavi Veskimägi, Estonian Minister of Finance.

“As declared in the statement released by the European Union, following a careful assessment of the appropriateness and sustainability of Estonia’s currency board, it was accepted that Estonia joins the exchange rate mechanism with the existing currency board arrangement in place, as unilateral commitment”, said Mr Vahur Kraft, Governor of Eesti Pank (Bank of Estonia). The standard fluctuation band is +/- 15 per cent.

ERM II is a multilateral agreement with an objective to endorse the exchange rate stability and co-ordination in Europe. Entry to ERM II is also a necessary phase to adopt European common currency euro in Estonia. ERM II is a framework where after multilateral consultations (including EU Member States, European Central Bank, European Commission, ERM II applicant) the participants tie the exchange rates of their national currencies to the euro. During the ERM II period the country preparing to adopt the euro has to keep its national currency stable to euro and fulfil Maastricht criteria (inflation, interest rate, exchange rate, fiscal balance, government debt criterion). Membership in ERM II will be minimum two years but the length also depends on the fulfilment of Maastricht criteria. Thus it is particularly important that Estonia continues to stick to a stable economic and budgetary policy. Structural reforms aimed at further enhancing the economy’s flexibility and sound fiscal policies have to be continued.

Both the Government of Estonia and Bank of Estonia share the official position that rapid euro adoption is appropriate for the country and contributes to sustainable development. Estonia has extensive trade and investment relations with the European Union, national currency is pegged to the euro and entry to the euro area is a logical step. Euro adoption helps further to reduce the risk of exchange rate fluctuations and as a result of this, the differences in interest rates between Estonia and euro area also decrease. Further benefits arise from the reduction of transaction costs, both for the companies using euro in foreign trade and individuals travelling in the euro area.

At the request of the Estonian authorities, the ministers of the euro area Member States of the European Union, the President of the European Central Bank and the ministers and the central bank governors of Denmark and Estonia have decided, by mutual agreement, following a common procedure involving the European Commission and after consultation of the Economic and Financial Committee, to include the Estonian kroon in the Exchange Rate Mechanism II (ERM II).
The central rate of the Estonian kroon is set at 1 euro = 15.6466 kroon.

The standard fluctuation band of plus or minus 15 percent will be observed around the central rate of the kroon.

Following a careful assessment of the appropriateness and sustainability of Estonia’s currency board, it was accepted that Estonia is joining the exchange rate mechanism with its existing currency board arrangement in place, as a unilateral commitment, thus placing no additional obligations on the ECB.

The agreement on participation of the kroon in ERM II is based on a firm commitment by the Estonian authorities to continue with sound fiscal policies, which are essential for preserving macroeconomic stability, for supporting an orderly and substantial reduction of the current account deficit, and for ensuring the sustainability of the convergence process. The authorities will closely monitor macroeconomic developments together with the responsible EU bodies, and they will strengthen the fiscal stance if warranted. To help reduce the external imbalance and contain it at a sustainable level, they will take the necessary measures to contain domestic credit growth and ensure effective financial supervision, and they will promote wage moderation. Structural reforms aimed at further enhancing the economy’s flexibility and adaptability will be implemented in a timely fashion so as to strengthen domestic adjustment mechanisms and maintain the overall competitiveness of the economy.

The compulsory intervention points in the exchange rate mechanism will be communicated by the ECB and the Bank of Estonia, in time for the opening of the foreign exchange markets on 28 June 2004.

Information to the media representatives: A press briefing dedicated to Estonian ERM II entry will be held on Monday, June 28 at 12:00 p.m. in the Ministry of Finance of Estonia (Suur-Ameerika 1, Tallinn). Mr Taavi Veskimägi, Estonian Minister of Finance, and Mr Andres Sutt, Deputy Governor of Eesti Pank are the speakers.
Source: Ministry of Finance